3 Tax Considerations before You Sell Your Stock

Before you sell your stock, there are a number of different factors that you are going to have to think about. One of the most important aspects of this transaction is how the taxes will be handled. Here are a few tax considerations to think about before you sell your stock.

1. Holding Period

One of the most important things for you to look at when you are selling your stock is the holding period. You need to know how long you have owned the stock that you are thinking about selling. Depending on how long you have held the stock, you may be able to get a lower tax rate than normal. If you hold a stock for less than one year and sell it, you are going to have to pay taxes on the gain as if it were regular income. This means that you look at your marginal tax rate and pay taxes on the amount at that rate. If you have held the stock for longer than one year, you are going to go to a different, long-term capital gains tax rate. This tax rate is 15 percent. This means that if you are a high-income individual that is in the 35-percent tax bracket, this is going to save you 20 percent on your taxes. This can be a substantial savings, and you will want to keep track of how long you have held each stock because of this. If you are getting close to a year, you may want to hold on to the stock a little longer so that you can minimize your taxes.

2. Harvest Losses

Some people engage in a strategy known as "harvesting losses" so that they can save money on their taxes overall. This strategy involves strategically taking losses in order to offset the gains that they have made in the market. At the end of the year, you are going to pay taxes on the amount that you have won in the market overall. Therefore, if you can offset your gains with losses, you may not have to pay any taxes. This can be very effective when you combine short-term capital gains and long-term capital gains. For example, if you have a long-term capital gain, you are going to have to pay only 15 percent in taxes. Then if you combine that with a short-term loss, you may get to take the loss at a bigger percentage. This could allow you to make a profit overall and avoid paying taxes at the same time.

3. Choosing Your Next Investment

Before you sell a stock, you need to think about what you are going to do with the money afterwards. You should not sell a stock just so that you can sell it. You need to have another investment picked out ahead of time if possible. You need to realize that with the taxes and transaction costs that will be associated with selling your stock, you have to choose a good investment to put your money in next.

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